European carbon prices could hit €100 this winter as Iran war drives up gas costs

European carbon prices may soar to €100 per metric tonne this winter due to soaring gas costs stemming from the Iran conflict, according to a BoFA Global Research report. The report notes that global energy prices have spiked to their highest levels since Russia's invasion of Ukraine, with oil prices up around 40% since late February and European natural gas prices up more than double.

The report suggests that coal has become more economical than natural gas for European power generators, even after factoring in carbon costs. However, declining coal-generation capacity across the EU could limit the extent of fuel switching. The EU's Carbon Border Adjustment Mechanism and the gradual removal of free emissions allowances for domestic producers could further tighten the carbon market by raising demand for permits.

BoFA expects EU carbon allowance prices to dip below €80 per metric tonne in the second half of 2027, provided Middle Eastern LNG exports rebound to normal and new projects become operational as projected. The report also addresses the impact of elevated fuel prices on transport demand and emissions, noting that higher petrol and diesel costs have spurred consumers to cut down on driving and switch to electric vehicles (EVs), dampening demand for conventional fuels.

BoFA anticipates rising sales of EVs and electric trucks in China, which could further weaken petrol and diesel demand if trends persist. The bank also forecasts global oil demand to dip in 2026, contracting by roughly 3 million barrels per day, before rebounding by about 4.3 million barrels per day annually in 2027. Regardless, BoFA anticipates overall European Union emissions to decline this year, thanks to cuts in other sectors, including road transport.